What are the differences and interlinks between governance and management? Whereas this simple question is an easy one for the corporations’ practitioners at the board level and/or senior management, it still, somehow, remains hard to figure out by public and entry-level professionals, especially when they study the understanding of governance versus management from the Anglo-Saxon’s literature which base on the one-board system whilst they live and observe the practice in Indonesia which base on the two-board system. Let us examine what the international standard ISO 37000:2021 (Governance of Organizations – Guidance) says and how it is described in Indonesia company law which recognizes the two-board system.
ISO 37000:2021 has provided a working understanding between governance and management. It said that “Governance” and “Management” are distinct, necessary and complementary activities that interact and influence one another. Governance involves setting and being accountable for the organization’s fulfillment of its purpose within the parameters set for the organization, whereas management is about fulfilling the associated objectives by making choices within those parameters. The governing body should ensure the clarity of roles and responsibilities of all involved and hold accountable those to whom they delegate (ISO 37000:2021).
ISO 37000:2021 further said that “The degree of separation of duties between the governing body and managers varies according to organizational needs and circumstances. In certain circumstances, such as an executive member of the governing body, an individual can be required to fulfill both governance and management responsibilities. In such cases, it is important for that person to be able to distinguish when they are fulfilling the different responsibilities and act and behave accordingly”.
Using the understanding above, let us turn our attention to governance and management in the context of a two-board system bounded by the Indonesian company law. As such, we recognize three organs: General Meetings of Shareholders (GMoS), Board of Commissioners (BOC), and Board of Directors (BOD). In bahasa Indonesia, GMoS is understood as “rapat pemegang saham” which consists of two types “rapat umum pemegang saham’ (RUPS) and “rapat umum pemegang saham luar biasa (RUPSLB), whereas BOC is understood as Dewan Komisaris and BOD is understood as Direksi or Dewan Direktur. Let us review their respective roles and duties as regards governance and management.
GMoS is the supreme organ in Indonesian corporation, they appoint both BOC and BOD on behalf of the shareholders and also dismiss them when their term is due or if dismissal is necessary required. BOC is accountable for oversight duties which are merely governance domain, whereas BOD is accountable for the executive duties, which are partly governance and mostly management.
Later in this article, if we use governing body, it means BOC, and if we use governing bodies, it means BOC and BOD of the company.
BOC as a governing body
AGMS appoints BOC members, and their name is stipulated in the company’s article of the association, respectively. Their role and duties are to assure that the governance principles and practices are carried out properly by the organization for the best interest of the firm. Some are held fully by BOC, and some are jointly held together with BOD in the two-context board system in Indonesia.
Governance is the practice of the BOC coming together to make decisions about the company’s direction. Duties such as oversight are fully held by BOC, whereas other governance activities, i.e., strategic planning, strategic decision-making, and financial planning and reporting, are jointly held together with BOD. As such, BOC should refrain from getting directly involved in daily executive matters. BOC allows directors and one level below director to develop their operational strategies, and BOC reviews the strategy to make sure they’re in keeping with the overall planning. In this case, BOC must take action when necessary for the firm’s best interest, especially with regard to unexpected crises. BOC has collective accountability, meaning its decision is only valid if made on behalf of BOC as a whole governing body.
BOD as a governing body and top management
Besides some governance duties jointly held by BOC above, BOD is accountable for the management of the company based on Vision-Mission and Values of the organization to realize the strategies into actions for the firm’s best interest. AGMS appoints BOD members, and their respective name is stipulated in the company’s article of association. BOD could assign their specific individual duties among themselves, e.g., finance, marketing, human capital, technology, etc. However, they are accountable jointly and severally, hence collective and collegial.
Is BOD top management? Yes, they are. Is BOD a governing body? Yes, in a way, jointly with BOC.
In this case, top management could consist only of BOD or add some non-BOD called Non-BOD C-Level. In this case, they could appoint some non-BOD C-level such as Chief Finance Officer (CFO), Chief Marketing Officer (CMO), Chief Technology Officer (CTO), Chief Compliance Officer (CCO), and Chief Operations Officer (COO). Those non-BOD C level names are not stipulated in the company’s article of association. As far as accountability is concerned, BOD could not delegate its accountability to the non-BOD C-Level. They can appoint them and share the authority but not the accountability.
One thing to note: whereas the accountability of BOC is collective accountability, the BOD accountability is collegial and collective. It means they are accountable and liable severally and jointly among BOD members. In other words, any agreement between one BOD member with external parties will bind all BOD members to be held accountable. Therefore, checks and balances among themselves are critical.
Governance vs. Good Corporate Governance
In a perfect corporate world, all the managers and employees know their duties and responsibilities and act on them responsibly. They’re honest and hardworking people with a solid commitment to ethics and integrity. Unfortunately, that isn’t always the case. The governing bodies are intended to be the check and balance that oversees employees and all aspects of the company’s operations. How do they do it? Through implementing Good Corporate Governance Principles: Transparency, Accountability, Responsibility, Independence, and Fairness in all aspects of the corporation.
Since the governing board is ultimately responsible for all related company’s performance and conduct, they are supposed to discharge their fiduciary duties, which covers at least Duty of Loyalty – making decision and action always for the best interest of the firm, Duty of Skill – making decision and action always with appropriate skills and Duty of Care – making decision and action always with due care.
I hope this article is useful for future board members and risk professionals.
Dr. Antonius Alijoyo
Founder of Center for Risk Management and Sustainability Indonesia